Devastation
For many, January 7th, 2025, will be a day that is not easily forgotten, the day that first broke news of the fires ravaging the communities of Los Angeles County. Our headlines and newsfeeds have since been painted with apocalyptic photos of recently flourishing cities reduced to ashes. Beyond the barrage of images, there are real people, people we know and love, people who have been completely uprooted without any clarity about when “normal” will return for them, their families, and their communities.
There are just no words.
In one sense, this is all so fresh and almost too sensitive to discuss here on TOM. Yet, I’ve committed to our readers that I would continue to bring forth discussions that are both relevant and advice-centered (actionable).
What I’d like to accomplish today is to (1) uphold the highest respect for those impacted by these fires – my prayers and thoughts are with you and (2) provide practical advice for all of us regarding how we should prepare for the worst.
In Preparation…
The thousand words I will share today will not be an exhaustive preparation list, but I will submit to you three action items that would be wise for you to heed and execute.
Those of us in California, Texas, Florida, or many other parts of the US have felt the pressure of rising insurance (homeowners) costs and the difficulty of finding coverage in general. This being the insurance backdrop prior to these recent fires, a landscape I assume will become even more challenging.
All of this points to the importance of having a trusted advisor overseeing your insurance portfolio. Personally, I resource our external partner, who serves many of our clients, and I am incredibly thankful for the work that he and his team provide. The greatest encouragement I could give you would be to thoroughly review your insurance portfolio to help identify any gaps or corrections that deserve your attention. This is a common service we facilitate for clients and one that is often overlooked in the field of financial planning.
With that said, now we will jump into my three bullet point list of how to prepare for the worst.
Replacement Cost
Most of my knowledge in the field of property and casualty insurance has simply come from being a silent participant in countless policy reviews. As mentioned, we lean on an external partner as a subject matter expert, and their team will comb through existing policies to help provide our clients with guidance. Regularly being in a listen-only mode, I’ve picked up on different themes and common threads that surface in many of these review meetings. One of those threads at the top of my mind is “replacement cost.”
The insurance industry has its language, much like that of the other facets of personal finance (e.g., tax or estate planning), and one needs to pick up a certain fluency to even read through a policy. When I refer to “replacement cost,” which could be an interchangeable term with rebuilding cost, I’m talking about what the insurance company has agreed to pay if your home needs to be rebuilt.
As some of you may have experienced firsthand or perhaps read about, building costs over the last 5 years have seen a significant increase. Our family completed a meaningful remodel a few years ago, and we had a front-row seat for those rising costs. Using COVID (2020) as a line of demarcation creates an almost night-and-day invoice for those who built in 2019 versus 2023.
Here’s the issue: Most policies we review have insufficient coverage for rebuilding a property. This figure (replacement cost) was/is either deficient due to someone using a subpar estimator or simply a legacy calculation that would’ve been sufficient in the world of old pricing but not so much in the current construction cost.
An insurance review with a trusted party would be ideal. Still, even a simple calculation of that replacement value – which you can find on your declaration pages – divided by the square footage of your home is a good starting point. Ask a contractor, ask a few contractors, what is the price per square foot to build in my neighborhood? Then, see how that compares to your current policy’s rebuilding cost per square foot. Many of the reviews we conduct reflect a number that is meaningfully underinsured.
Inventory
Some years ago, a dear friend of mine lost his home by way of a tornado. He was away on vacation and was privy to the fact that a tornado had made its way through his hometown, but only on the drive home did he realize his home and his vehicles were no longer where he left them.
The shock and devastation of this experience is one thing, as he described it, but the story is not often told, which is the workload in the aftermath of it all. The insurance adjuster will want an itemized list of everything the insurance company is on the hook to cover. For my friend, this is where the long journey into his memory began, as he sought to recall every toaster oven and recliner in the home that needed to be replaced.
Taking inventory is one of those things that is a much easier exercise as a proactive activity versus a reactive one. I do not have a photographic memory; even if I did, I’m unsure how well it would function in a time of distress. In the era of technology and iPhones, this inventory process has become quite a bit easier. As the kids often say, “There’s an app for that.” So, whether you use an application on your phone, take a recorded video, or use a legal pad, you should have a basic inventory of your belongings itemized by room. Again, the proactive approach here is doing this now, before any damage or evacuation that may come in the future.
I know this isn’t the most fun Saturday activity, but those who have experienced the worst know this is a crucial list to keep up to date.
Go Bag
I use the term “Go Bag” here loosely. The primary use of this descriptor [Go Bag] is probably a backpack full of items to help you survive for 3 or 4 days in case of a dire emergency. Although that too may be important – beyond my scope of expertise – I am more referring to the importance of organizing key financial documents both physically and digitally.
Your financial planning Go Bag will consist of estate documents, deeds, social security cards, birth certificates, etc. You will need a safe place to house these physically and a secure location digitally. It is standard practice for our team to build a digital vault to store all key financial documents for a client. This is often not something one completes in a day or over a weekend, but rather a library that is intentionally built up over time.
It wasn’t too long ago that I had a client take a fall while on vacation, a fall that resulted in a serious head injury. A family member was limited in their access at the hospital because of HIPAA rules, and I was just a phone call away from sending their medical directive over via email. This was a prime example of where that digital Go Bag saved the day.
For many of our readers, this should be a goal for 2025 – start building up this digital library of key financial documents and create a central storage for the needed physical copies.
Hope
As I close out today’s discussion, I will reference the title: Prepare for the Worst. As you may be familiar, that’s only the first line of the popular adage, which states, “Prepare for the worst, and hope for the best.”
Hope is powerful, and for many of us, hope is what is needed. It seems as if anxiety rules the day, and anxiety is a fear about what the future has in store, while hope looks forward to a bright future. My hope and prayer is that God will raise beauty from the ashes in all that has been destroyed. The last few weeks’ events have been tragic and close to home for me (literally), yet I remain hopeful.
Hope is not the replacement for preparation but a great accompaniment. Today’s action items are within your reach – they are understandable and actionable. I hope they are helpful and make a positive impact on your financial plan.
Until next week…
